National Association of Home Builders Discusses Economics and Housing Policy

House Prices: the “Priced Out” Effect

NAHB Economics regularly receives requests to evaluate the effects of pending new regulations on housing affordability in local markets where regulatory actions are expected to raise home prices. The NAHB Priced Out Model provides straightforward answers on the issue. The model estimates how many households can qualify for a new home mortgage before and after a house price increase. The resulting difference is the number of priced out households. Anew research paper from NAHB Economicsdiscusses the priced out methodology in detail and presents the new 2012 estimates for the United States and 325 metropolitan areas.

The 2012 estimates show that nationally a $1,000 increase in the home price leads to pricing out about 232,447 households. The size of the impacts across metropolitan areas ranges from more than 6,000 households in Chicago-Naperville-Joliet, IL-IN-WI to only 14 households in Napa, CA. These large differences mainly depend on metro population, new home prices and income distribution. The Chicago-Naperville-Joliet, IL-IN-WI metro area registers by far the largest priced out effect in the nation, in part because it is a relatively affordable metro area where 43 percent of households can afford a new home, and in part because it is a populous area with almost 3.5 million households residing there. On the other hand, in Napa, CA, where half of all new homes sell for more than $700,000, only 13 percent of households can afford new homes to begin with. So adding another thousand to the price disqualifies only 14 households from buying a new home.

Looking at the affordable metro areas, where more than fifty percent of households can afford new homes, the priced out effects are large and can often disqualify thousands of new home buyers. In Houston-Sugar Land-Baytown, TX, almost 4,700 households are priced out of the new home market as a result of prices rising by $1,000, in Atlanta-Sandy Springs-Marietta, GA – 3, 771 households.

Even though the NAHB Priced Out Model does not estimate effects of new regulation on new home sales or housing starts, it highlights often overlooked effects of regulation on affordability of new homes.

The research paper also notes that every time a local or regional government raises construction costs by, for example, increasing building permit or impact fees, the final price of the home to the buyers usually goes up by more than the increase in the government fee. This is because other costs such as commissions and financing charges automatically rise as well. As shown in Table 1, these add-on charges range from 0 percent if a fee is imposed directly on buyers to 39 percent if cost is incurred when applying for site development approval. So that for every $1 increase in fees incurred, for example, when acquiring a building permit, the final price of a new home to its final customer rises by $1.20.

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If that many people are priced out by a $1,000 price increase, just think how many are affected by adding a point (percent) or two to mortgage costs. Does anyone see the problem with increasing FHA Mortgage Insurance Premiums and adding a tax on lenders to fund the worthless 2% cut in social security taxes to “stimulate” the economy. If you believe the lenders will pay this or any tax without passing it on to borrowers, you are probably part of the problem. The Federal Government is stuck on stupid!

The Priced Out Model estimates that approximately 1.1 million U.S. households will be priced out of the market for a median-priced new home by a quarter point increase in the mortgage rate under the current market conditions. You can see the estimates on here